Friday 30 March 2012

Burden of proof is on assessee to prove source of undisclosed income

It is the assessee who is in full possession of facts regarding the true character of the amounts and the sources from which they v/ere derived and Section 106 of the Evidence Act casts on him the burden of proving what lies within his special knowledge.
S. Kumaraswami Reddiar vs Commissioner Of Income-Tax on 20 March, 1959
Equivalent citations: AIR 1960 Ker 9
Bench: V Iyengar, A Chandy
1. This is a reference under Section 66 (2) of the Indian Income-tax Act, by the Income-tax Appellate Tribunal, Madras Bench. The question referred is :
"Whether on the facts and in the circumstances of the case, an addition of the sum of Rs. 25,856 having been made to the profits and gains of the business carried on by the assessee, the further addition of the sum of Rs. 17,402 representing the total of the credits in the books and deposits in the banks in the account year, is lawful".
The assessee, S. Kumaraswamy Reddiar, is a wholesale and also retail piecegoods merchant carrying on business at Alleppey and Quilon. In computing the profits on the assessee's business for the assessment year 1123 M.E. the Income-tax Officer found that the accounts maintained by the assessee were unreliable and the profits had therefore to be estimated. Accordingly he made an addition to the book version of the profits to the extent of Rs. 26,418 in respect of the Alleppey business and Rs. 11,438 as regards the Quilon business. He further found that certain deposits in banks and certain advances entered in the books of account at the Head Office totalling Rs. 83,926 were only secret profits. The petitioner was assessed on this amount also. In appeal by the petitioner to the Appellate Assistant Commissioner, Trivandrum, the estimated addition made by the Income-tax Officer was upheld but only to the extent of Rs. 14,418 for the business at Alleppey and Rs. 11,438 for Quilon together making up Rs. 25,856.

He also upheld the addition made by the Income-tax Officer under the category of secret profits as limited to three items, viz. (i) Rs. 2,375 in the petitioner's wife's account, (ii) Rs. 2,000 credited in the account of one Thiruvenkita Reddiar and (iii) Rs. 13,027 representing deposits in bank (i.e.) Rs. 17,402 on the whole. The petitioner took further appeal to the Income-tax Appellate Tribunal, Madras objecting to the estimate of the extra income of the petitioner's business at Alleppey and Quilon and also to the additions made of the credits and deposits as income of the petitioner. The contention was raised that the addition of Rs. 17,402 could not be sustained inasmuch as an addition of the profits of the petitioner's business at Alleppey and Quilon had already been made. This contention was rejected by the Appellate Tribunal. It is this contention that is again the subject of the reference here.
2. Learned counsel for the assessee contends that the Department has no case that the amounts represented by the credits and bank deposits were income from some special undisclosed business which the petitioner had. Learned counsel referred in this connection to the passage in the order of the Appellate Assistant Commissioner where after referring to the contention raised on behalf of the assessee, "that both turnover and the gross profit thereon having been taken at rates considered reasonable it cannot be held that in addition to such profits the appellant had derived other unaccounted profits from the same business during the same year and on the same turnover" the observation was made "I cannot say that this contention is without force since the Income-tax Officer has assessed the alleged profits (secret) as part of the appellant's income from his cloth trade but not from any undisclosed sources". So if the assessee was already assessed on estimated income he could not again be assessed in respect of those amounts.
Learned counsel for the Department however questioned this assumption of the Appellate Officer and said that the Income-tax Officer had really treated the credits and deposits in question not as income of the business at Alleppey or Quilon but rather as coming from other sources which had not been disclosed in the books or in the return. And even assuming that the Income-tax Officer was not very clear on the point, the Appellate Tribunal had according to learned counsel, definitely proceeded on that basis when they said "we cannot accept the learned counsel's argument that these credits came out of suppressed account out of transactions disclosed in the books". We accordingly proceed on the footing that the amount of Rs. 17,402 did not represent part of the profits which had already been estimated.
3. Now this question as to the exhaustiveness or otherwise of the estimated profits of the business has come up for consideration in several cases. In Ramcharitar Ram, Harihar Prasacl v. Commr. of Income-tax, (1953) 23 I.T.R. 301 : (AIR 1954 Pat .143) relied on by the assessee the Income-tax authorities found that the trading account maintained by the assessee did not show his true profits and assessed him on an estimated income of Rs. 15,644 in excess of the amount shown in the books of account. The Income-tax authorities also held that a sum of about Rs. 85,000 shown as cash credits in the personal accounts of the partners should be added to the income from business.
On the question whether the assessee was liable to be taxed on the sum of Rs. 15,644 as extra estimated profit and also on the sum of Rs. 85,000 shown as cash credits but which had been found by the taxing authorities to be income from undisclosed sources, the learned Judges of the Patna High Court held that it was not open to the Income-tax authorities to add up both the cash credits and the estimated excess of the profits over the amount shown in the books of account and to hold the amount so added up was taxable in the hands of the assessee.
That according to the Judges would amount to double taxation. According to the learned Judges it was only when there was material to show that the assessee carried on an independent business apart from the business for which the assessment was made, that he should be assessed to income-tax adding both the amounts. There is an earlier case in the same court Srinivas Ramakumar v. Commr. of Income-tax, (1948) 16 I.T.R, 254: (AIR 1949 Pat 211) but not referred to in the above case. In that case the Income-tax authorities found the account hooks of the assessee's business unreliable and therefore assessed the profits of the business at a flat rate.
Against the income so ascertained the assessee claimed to set off certain losses alleged to have been incurred in speculative transactions. In ascertaining the net amount of losses the Income-tax authorities treated a sum of Rs. 3,500 entered in the suspense account in the books of the assessee's! head office as undisclosed profit of tbe speculative transaction. They did not believe the explanation of the assessee that the sum represented deposits made by a member of the family.
It was held that although tlie income-tax authorities applied flat rates to cover suppressed, income, they were entitled to include the sum of Rs. 3,500 as secreted profits of the firm; the addition of the sum did not amount to double taxation inasmuch as it was brought into account not as profit of the trading transactions but as undisclosed profit of the speculative transaction. Indeed the ease in (1953) 23 I.T.R. 301 : (AIR 1954 Pat 143) would appear to have been treated as peculiar on its facts and distinguished in all the later cases that have arisen on the subject. Thus in D. G. Auddy and Bros. v. Commr. of Income-tax (1955) 28 ITR 713: (AIR 1956 Cal 295) before the Calcutta High Court the case in (1953) 23 I.T.R. 301 : (AIR 1954 Pat 143) was referred and distinguished and the learned Judges observed :
"Indeed, unless there be strong reasons to connect unexplained cash credits with the undisclosed profits derived from a known source of the income, it is not possible to see how the taxing authorities can follow any course other than bringing them under assessment as income from other undisclosed sources. As has so often been pointed out, it is the assessee who is in full possession of facts regarding the true character of the amounts and the sources from which they v/ere derived and Section 106 of the Evidence Act casts on him the burden of proving what lies within his special knowledge.
We must proceed on the assumption that when his explanation is rejected, it is properly rejected .....It is unrealistic to demand that be (the I. T. Officer) should find out that some source other than the disclosed ones, in fact existed and should indicate what that source is before he can permit himself to bring the amounts under assess-ment as disclosed profits."
The learned Judges then referred to Lal Mohan Krishna Lal v. Commr. of Income-tax, West Bengal, (1944) 12 I.T.R. 441 : (AIR 1945 Cal 62) and the observations of McNair, J :
"On behalf of the assessees it is urged that the burden of proof is on the Income-tax authorities and that before they can arrive at the conclusion that a particular sum represents income they must establish that fact by positive evidence. Section 6 of the Act, it is said, defines taxable income. One of the heads of income, namely, No. 6, is 'other sources.' It is argued that if an item is included by the Income-tax Officer as income from other sources he must establish affirmatively what are those sources. This is a proposition which I am unable to accept"
and then went, on to hold that :
"On the facts and circumstances of the case the addition of the sum of Rs. 23,583 as income from undisclosed sources was legally justified even though an estimate of the gross profit on the turnover of the business had already been made and the sum of Rs. 50,000 had been added as suppressed income from business."
The next case in Chenna Basappa v. Commr, of Income-tax, (1958) 34 ITR 576: (AIR 1959 Andh Pra 368) before the Andhra Pradesh High Court, also distinguished the case in (1953) 23 I.T.R. 301 : (AIR 1954 Pat 143. In that case the Income-tax Officer had rejected the accounts of the assessee and estimated the profits and made an addition to the disclosed profits and further added amounts represented by cash credits in the accounts for which the assessee did not furnish any satisfactory explanation as secret profits from undisclosed sources. And the learned fudges held that it was onen to the Income-tax Officer to make the two additions which fell under two distinct heads, one attributable to the business activities of the assessee and the other to profits from an undisclosed source, i.e. some profits earning activity which is altogether unknown.
They made it clear at the same time that if "will not be permissible for the Income-tax Officer to estimate the gross profits from the business and again to add to it the cash credit shown in the books in some disguise, as part of the income of the same business. The matter arose still more recently before the Madhya Pradesh High Court in Kalekhan Mohamed Hanif v. Commr. of Income-tax, (1958) 34 ITR 669: (AIR 1958 Madh Pra 271). There also all that remained was the fact of cash credits for which no explanation existed and in such circumstances the Income-tax Officer was held to be justified in taking the evidence of the books showing the cash deposits as conclusive of the fact that some income was made and related to an undisclosed source and he was not bound to indicate what that source was. Learned Judges observed :
"The books of account show the income made from the normal business of the assessee. That income may be suppressed or minimised by the addition of expenses etc. and reduced to a lesser figure. The cash credits do not show that the income which is in the hands of the assessee is from the self-same source. It may be from another source. Tf the assessee does not disclose that source and the existence of such hidden source is deducible from the proceedings and the account books, then the Department is not required to deduct the amount from the income which has been deduced at the enhanced flat rate on the ordinary business of the assessee."
The principle is therefore deduci'ole that where the assessee gives no satisfactory explanation of a cash credit or bank deposit it is open to the Income-tax Officer to hold that it represents an income from an undisclosed source. It is not a question of suspicion or conjecture. He can only act on the evidence which is tendered before him, and where the evidence tendered is worthless or not tendered he would be justified in taking the evidence of the books showing the cash deposits as conclusive of the fact that some income was made and related to art undisclosed source. In this case the Income-tax Officer was willing to find in respect of the credits and bank deposits, that "It was clear that the assessee had money dealings over and above what is reflected in his books of accounts" and he proposed to treat them as secret profits for purpose of Income tax. This finding has been confirmed by the Appellate Tribunal. If so no question of double taxation can arise,
4. We hold accordingly that the assessee fails in the reference. We therefore answer the question referred in the affirmative. The assesses will pay the costs of the Department Counsel's fee Rs. 150.
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